Silver and the General Stock Market

Like many silver and gold investors, my eyes were glued to the ticker tape
this week wondering how silver and its derivative stocks would fare during
this downturn in the global markets. To think that silver would be unaffected
would be naïve but of course the question was in which way would it be
affected? Would it go up, down or move in a channel?

Indeed it was not difficult to find commentaries which said that a stock market
downturn was positive for silver because it provided a safe haven for investors
while there were those who predicted that silver as a commodity must suffer
since the stock market is a leading indicator of economic activity. The question
being, do investors treat silver like money or a commodity?

Well, what has silver actually done in comparison to the US stock market?
Using a broad index as a measure, I first plotted a semi-log graph of the silver
(black) and the S&P500 index (green) for the last 40 years.

On this broad sweep we can safely say that silver and the stock market are
poorly correlated. During 1980-2000 silver may not have followed the stock
market on an upward trend, but silver never moved upwards when the market moved
down.

However, during the 1970s, it was more mixed as silver went up while the stock
market went down during the years of 1972-1974 and 1976-1978 as inflation fears
began to concern investors but did follow the general trend at other times.

The reasons why the 1970s and this decade provided better correlation was
due primarily to US Dollar bear markets while 1980-2000 was a dollar bull market
in general and a disinflationary environment which is a safe haven for fiat
money investors. Moving into this decade and the present silver bull market
we get just as confused a picture.

For our three silver surges of 2004, 2006 and 2008 the S&P500 index has
respectively been strong, neutral and weak! In other words, if you want indications
of where the price of silver may be going, do not use stock market indices
to help you!

Again, let me iterate that the silver bull market is about money - fiat money
versus real money. The fiat dollar has been rapidly inflating away in value
for the last 6 years. At this rate it could approach half of its 2000 value
but we think it will stop short of that. When the fiat money balloon expands
full of worthless air, investors shift to hard money as in gold and silver.
That's the situation in a nutshell.

When the markets rallied this week on the Fed 0.75% cut, silver was certainly
not rising on the tails of a stock market recovery. Rather it was responding
to a large rate cut that spelled further weakness for the US Dollar and a visit
to the realms of negative real interest rates.

Ben Bernanke has helped set up gold and silver for a further surge in prices.
It is still not too late to get on board to hedge against the dollar losses
in your other investments.